updated 10/29/2006 4:28:57 PM ET 2006-10-29T21:28:57

With oil prices well off their summer highs, consumers feel some relief, but U.S. rail customers remain angry over the fuel surcharges levied by railroads to move their goods.

“The railroads shouldn’t be allowed to collect a nebulous, made-up charge,” said Steve Sharp, head of fuel procurement at the Arkansas Electric Cooperative Corp. “What we require is at least a mild degree of transparency from the railroads.”

AECC co-owns three coal-fired power plants and uses up 5 million tons of coal per year.

As oil prices were on the rise, U.S. transport companies --from railroads and trucking companies to shippers like United Parcel Service Inc. and FedEx Corp. -- passed on higher fuel costs to their customers via fuel surcharges.

But while truck company customers apparently have accepted the surcharges as a fact of life, rail shippers like AECC are angry because they say the railroads are making a profit.

Railroads vigorously deny this claim.

“We don’t profit from surcharges, we don’t even recover our costs,” said Michael Ward, CEO of railroad CSX Corp.

The Surface Transportation Board, the U.S. government regulator charged with resolving rate disputes between the railroads and their customers, held hearings in May on the fuel surcharge problem and is now reviewing comments from both sides in an effort to find a solution.
STB officials said no deadline has been set.

Analysts say that, unlike truck companies, railroads have only recently gained the power to apply these fees.

Some add there are rail shippers who may be paying more than is fair to cover for those not paying any fees.

Flammable issue
For all in the U.S. transportation sector, rising fuel prices over the last few years have hurt -- even including the drop from July’s highs of around $78 per barrel to about $60 now.

From major companies like railroad Union Pacific Corp.  or truck outfit YRC Worldwide Inc. to self-employed truckers like Kevin Osbourn, surcharges make a big difference.

“If it weren’t for fuel surcharges, I’d be out of business,” said Osbourn, 37, of Vina, California, a long-haul truck driver for 17 years. The companies he drives for levy the surcharges and pass them on to him, he said.

Surcharges follow fuel price changes with a lag of a week for truck companies and two months for rails.

When prices go up, transport companies lose revenue before their surcharges catch up, but then get a boost as they fall.

“Over a year this tends to balance out,” Bear Stearns analyst Edward Wolfe wrote in a recent research note.

One example of the short-term impact is major long-haul truck company Swift Transportation Co. Inc. . When this Phoenix, Arizona-based company reported third-quarter results on Oct. 25, it stressed that its quarterly revenue was up only because fuel surcharges were lagging falling prices. Minus the surcharges, sales were down.

But beyond this material impact on revenue, truck companies say surcharges are broadly accepted by customers.

“Fuel surcharges are simply seen as part of doing business,” YRC Worldwide CEO Bill Zollars said.

Rail customers, however, see it differently. While they do not oppose surcharges in principle, they say they do not like how they are levied.

“The fuel surcharges are not transparent and there is no recourse against them,” said Tom Schick, senior director for distribution at lobby group the American Chemistry Council.

Merrill Lynch transportation analyst Ken Hoexter said the difference between truck and rail fuel surcharges is that the trucking industry has had them for more than a decade, “but up until recently the railroads had no leverage with customers to be able to apply surcharges.”

Rising U.S. imports and soaring coal shipments, which utilities want to use instead of more expensive natural gas, have changed that, with capacity straining demand.

Now, the rails have the power to raise prices and levy surcharges, Hoexter said.

“So far we do not have any evidence the railroads are profiting from fuel surcharges,” he added. “However, some customers may be paying more than their fair share.”

This is because long-term contracts signed before surcharges were introduced carry no such fee. As those contracts come up for renewal then any unfairness in the system should be ironed out, Hoexter said.

Railroad analyst Tony Hatch at New York-based ABH Consulting said “for investors, the most important thing is the railroads should not lose money because of fuel prices.”

“The current system is not perfect,” he said, “but until someone thinks of a better one, customers are stuck with it.” 

Copyright 2012 Thomson Reuters. Click for restrictions.

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